I am an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, I serve on the Board of Directors for the Bitcoin Foundation.

Government Ban On Bitcoin Would Fail Miserably

In a blog post last week at Unqualified Reservations, the author described a fictitious account of how bitcoin dies because a “DOJ indictment is unsealed” naming any and all BTC exchange operators as criminal defendants and the “BTC/USD price falls to zero and remains there.”

While this U.S.-centric plot would seem more plausible in a cryptographic flaw scenario, it does bring to light some interesting game theory strategies for both regulators and free market monetary proponents. Aside from the impact on price, would a government ban on bitcoin, including a direct ban for law-abiding merchants, shrink the available size of the so-called bitcoin market? Is an officially “illegitimate” bitcoin a useless thing?

I maintain that a government ban on bitcoin would be about as effective as alcohol prohibition was in the 1920s. Government prohibition doesn’t even do a good job of keeping drugs out of prisons. The demand for an item, in this case digital cash with user-defined levels of privacy, does not simply evaporate in the face of a jurisdictional ban. One could even make the case that it becomes stronger because an official recognition that Bitcoin is not only a “renegade” currency but a “so-effective-it-had-to-be-banned” currency would imbue the cryptographic money with larger than life qualities.

Ironically, the ban would create something like the Streisand effect for Bitcoin generating an awareness for entire new demographic groups and new classes of society. Unlike alcohol, bitcoin itself might not be considered a consumption good but it certainly makes it easier to acquire and sell certain consumption goods.

The under-banked people of System D would awaken to using bitcoin for eliminating onerous fees or the risk of handling cash. The individuals seeking drugs without violence or prescriptions would understand the imperviousness of sites like the agorist Silk Road. The anti-banking crowd would race to get their hands on some bitcoin as a symbolic gesture to weaken bankers’ firm grip on payments. The pro-gambling casino people would all of a sudden realize how play money bitcoin bypasses the ridiculous and religious anti-gambling laws. The asset protection wealth managers would start to become fascinated with esoteric things like deterministic brainwallets and Tor.

Which brings us to the giddy, pro-banking-integration spokespeople for Bitcoin that tend towards full compliance because it’s required or, worse, preemptive compliance because they believe it to be safe. What happens to their rosy world when bitcoin exchanges can no longer operate in the open without fear of State retaliation? After all, they were patiently counting on ‘railroad tracks’ and connected links with existing financial institutions to grant Bitcoin a legitimacy mandate.

Now with burgeoning covert and in-person exchange opportunities plus a variety of reliable exchanges operating outside of the U.S., the Bitcoin of our fictional story is far from fading into obscurity. Conversely, it is the ambitious opportunities for crony capitalism that fade into obscurity because a closed-loop bitcoin economy not requiring meatspace exchanges would emerge and accelerate.

One doesn’t drive Bitcoin underground. A free Bitcoin was designed to be ‘underground’ for its own survival otherwise it wouldn’t need such an inefficient, decentralized block chain. The low-cost and non-reversible bitcoin transactions that appeal to mainstream commerce are merely byproducts of a mutinous system that doesn’t rely on trusted third parties. Joel Bowman writing at The Daily Reckoning clearly recognizes that bitcoin’s future doesn’t depend on State legitimacy let alone low-cost sanctioned transactions:

In the end, bitcoin is a bet on the other side of The State’s coin; the free market side. It’s a bet that voluntary trade will, in the end, overcome neanderthalic force and coercion. It’s a wager that the conversation currently underway in the shadowy ‘black’ market is far more intriguing, far more complex, far more nuanced and exceedingly more interesting than the yip-yapping that distracts the undead, mainstream TV-consumer for an hour or so around feeding time every evening.

I would add that it’s also a bet on income and consumption privacy becoming the norm over ‘reportable earnings’ and invasive transaction tracking. It’s a bet that career mobility and independent contractor businesses will eventually outstrip the growth of the corporate wage-slave population. It’s a bet that the degree of an individual’s financial privacy is selected solely by the individual and not by what the State reluctantly permits.

Prohibiting bitcoin is the opposite of what a rational game theorist would conclude. But are our regulatory overlords smart enough to advocate a hands-off policy? If the State cannot plausibly ban bitcoin, why would they want to give it the additional power to grow and propagate? Bitcoin challenges the State as monetary sovereign and that has grave implications for their monetary authority and quasi-peaceful taxing authority. A savvy and smart regulator would seek to avoid the confrontation that “Old Bitcoin Radical” foresees.

Their best response to Bitcoin is irrelevancy, or failing that, extreme gold-like market manipulation for as long as possible. The end game for the State is perpetuating the fiat myth — their fiat myth not the populace’s cryptographic Bitcoin myth. They have always known that faith in money is a mass illusion, however they never considered that they wouldn’t be in charge of the illusion.

In the meantime, just enjoy the spectacle and relax people for mining bitcoin, holding bitcoin, sending bitcoin, and receiving bitcoin is not against the law in any country in the world.

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Bitcoin is a direct threat to corrupt governments who control and manipulate currency, and use taxpayer funds to buy votes. You better believe they’re going to ban it! But mutual barter systems will prevail on the web… and it’s a great thing. It will destroy the power that government yields uncontrollably and put it back into the hands of the people where it belongs.

It would also be very stupid to ‘ban’ Bitcoin. A smart government or corporation would spread bad news about Bitcoin to scare people and secretly take control of a large amount of bitcoins and mining businesses.

I don’t think the case for Bitcoin surviving a full-on government ban is quite that clear-cut. If it were any other garden-variety P2P technology, I agree, government action would fail miserably. But Bitcoin has one weakness that other systems do not have: the 51% attack. If the government can outspend the entire Bitcoin community on develooping ASICs, and turns them all on at the same time with the specific intent to block all transactions, it could bring Bitcoin to its knees within days. We still have a way to go before we can be laughing at governments too hard.

By the time the feds pass a bill or regulation regarding Bitcoin, the decentralized currency will be so large and so well integrated into the Internet that it there will be substantial public support for allowing it to continue existing.

Bitcoin’s greatest potential enemies are the payment companies (Visa, Mastercard, etc.). If Bitcoin starts to threaten their own online payment initiatives, then I can see these guys lobbying hard to put a damper on the ability of legitimate US companies to accept Bitcoin as a form of payment.

But is that really going to happen? I don’t think so. Bitcoin will facilitate grey market transactions primarily, and a small fraction of “legitimate” transactions. People will always find credit cards and wire transfers to be more convenient for transactions that aren’t banned in some way or another, or made difficult because of cross-border issues.

So what about the Silk Road? If it somehow reaches 1/10th the volume of the cartels, then the DEA will be the least of its worries.

Thomas Jefferson said: “I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restores to the people to whom it properly belongs.” In my new book – Digital Virtual Currency and Bitcoins” I cover the “evil global bankers” and their political control. When will we accept that the political class are controlled by the banker class and the regular class of people have only one choice Bitcoins. $18.23 per Bitcoin and going up. This will be the year of the digital currency and Bitcoin has won. Better diversify your portfolio and include some Bitcoins.